Insolvencies up 61% in February

After a year of relative calm, the spectre of collapses has returned to stalk weakened companies.

The number of insolvencies has jumped in early 2021.

After a year of relative calm where the number of corporate insolvencies in Australia receded, helped partly by JobKeeper stimulus and changes to the law through COVID-19 that protected businesses being forced into administration, the spectre of collapses has returned to stalk weakened companies.

The number of external administrations has soared 61 per cent in February compared to the previous month to mark the highest this figure has risen for a year, according to CreditorWatch’s latest Business Risk Review.

The latest report on insolvencies found that corporate collapses having declined for the previous 12 months, had now risen by more than 50 per cent in February while at the same time, credit inquiries have jumped by almost a third, indicating trading conditions are improving post the height of the pandemic and businesses are preparing to return to normal levels of service.

It comes as JobKeeper, which has pumped as much as $100bn into the Australian economy and then drip fed into businesses as consumers went shopping, is set to conclude at the end of March which could see a new flurry of corporate collapses as businesses right-size their operations to deal with the new realities or even shut down altogether. Businesses were also shielded by bankruptcy protection laws which were introduced at the emergence of COVID-19 that kept many insolvent businesses afloat. Those measures were initially extended but then ended on January 1.

According to the February 2021 CreditorWatch Business Risk Review, there has been a 61 per cent jump in monthly external administrations since January.

“This is a sign of the commercial climate returning to more normal conditions,” said Patrick Coghlan, chief executive of CreditorWatch.

“This figure is likely to rise again in the coming months, as JobKeeper ends and the three-month reprieve on credit arrangements for struggling smaller businesses comes to a close,” he said.

He said while the number of external administrations jumped sharply, other data points have yet to reflect 2021’s trading environment. For instance, the number of court cases is down 56 per cent in February 2021 compared to a year earlier.

Although the insolvency protection laws ended on January 1, businesses with debts of under $1 million were given an additional three months to work with an insolvency practitioner to restructure their operations and come to agreements with creditors to allow them to continue trading. Both this and JobSeeker come to an end on March 28.

“This could prompt a rash of insolvencies and, subsequently, redundancies, which could be a destabilising force on the local economy. The number of arrears and court cases related to bad debts tend to rise before insolvency numbers lift, and whilst there‘s no evidence of this yet, an increase following the end of government incentives at the end of March is a strong possibility,” Mr Coghlan said.

However, cushioning the ramp up of insolvencies could be the 29 per cent rise in credit inquiries in February against January, which could indicate improving economic conditions, albeit without taking into account seasonality.

“The February credit inquiry figure is the highest monthly number since August 2020. On a quarterly basis, credit inquiries are up by ten per cent in the three months to February 2021, compared to the equivalent period twelve months prior,” said Harley Dale, chief economist, CreditorWatch.

“Many businesses are ready to thrive in a post-COVID environment after becoming leaner and adapting their business models so this is very encouraging and will be essential in kickstarting a chain reaction effect across both the business sector and wider economy.”